India’s current account deficit (CAD) is expected to remain within a manageable range of 1.2-1.5% of GDP in FY25, according to a Bank of Baroda (BoB) report. Despite a higher trade deficit, the CAD narrowed to 1.2% of GDP in Q2 FY25 from 1.3% in Q2 FY24, aided by strong services exports and robust remittances. The capital account surplus rose due to increased foreign portfolio investor (FPI) inflows, even as foreign direct investment (FDI) outflows saw an uptick.
Consequently, the balance of payment (BoP) surplus surged to $18.6 billion in Q2 FY25, compared to $2.5 billion in Q2 FY24. “India’s external sector outlook has remained stable over recent months. The sharp increase in the trade deficit in November 2024, driven mainly by gold imports, appears to be a one-time anomaly,” said Aditi Gupta, Economist at Bank of Baroda. While merchandise imports have grown faster than goods exports, resulting in a widening trade deficit from April to November FYTD, services exports have proven resilient. These exports have been a key factor in maintaining CAD at sustainable levels. Remittances also remained steady, despite lower oil prices.
However, the looming threat of protectionist trade policies under the incoming US administration poses a potential challenge to India’s external sector outlook. Overall, the report projects CAD will remain in the manageable range of 1.2-1.5% of GDP in FY25, supported by resilient services exports, FPIs, ECBs, and NRI deposits.
